RTTNews - Sunday, the International Monetary Fund again raised the economic outlook for South Korea, supported by government's stimulus measures and the prevailing low interest rate.

Lifting the outlook, the IMF said the economy is set to shrink 1.8% in 2009 and recover with a 2.5% growth in 2010. Earlier in July, the lender had estimated a 3% contraction for this year.

Although, the IMF upgraded its estimate twice since July, it is still worse than the central bank forecast. The Bank of Korea expects GDP to decline 1.6% in 2009 and to grow 3.6% next year.

The IMF said, Going forward, the recent growth momentum is likely to moderate during the second half of 2009 and be followed by a drawn-out recovery. As the momentum created by the front-loaded fiscal stimulus and export gains from the steep depreciation of the won in early 2009 fade, the pickup in growth is unlikely to be sustained at the same pace, the lender added.

The IMF finds a distinct possibility that weak global exports will weigh on South Korean growth well beyond 2010 as Western consumers permanently raise their savings rates.

The Washington-based agency assessed that the Korean authorities responded with a timely and comprehensive set of financial market and macro-stabilization measures. The authorities set aside $55 billion in foreign exchange reserves to provide swaps or loans to banks and the central bank reduced interest rates by 325 basis points since October 2008.

On the fiscal front, the authorities enacted a stimulus package equivalent to 3.6% of GDP and provided quasi-fiscal support for ailing small and medium sized enterprises, especially in the form of credit guarantees. Further, they established a bank recapitalization fund and a toxic asset fund to shield the banking sector from the downturn and prevent major deleveraging.

The sharp devaluation of the exchange rate helped to avoid deflationary pressures. Meanwhile, external defaults and a credit crunch have been avoided and economic activity stabilized in the first quarter of this year.

A report from the central bank had revealed that the economy expanded 2.3% in the second quarter on a sequential basis, which was much faster than the 0.1% rise seen in the first quarter. On an annual basis, gross domestic product eased 2.5%.

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